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Debenture Module

Debenture notes

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26 views42 pages

Debenture Module

Debenture notes

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yrana8838
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After studying this ui + oe ee . company accounrs QC UNIT - 3 ISSUE OF DEBENTURES LEAR |G OUTCOMES you would be able to: Understand the meaning and basic purpose for raising debentures by the company Differentiate between shares and debentures of a company Understand various types of debentures Pass entries for issue of debentures payable in instalments Make entries for issue of debentures considering the conditions of redemption Pass entries for issue of debentures as collateral security Pass entries for debentures issued for consideration other than for cash Write off discount on issue of debentures Calculate interest on debentures. (© The Insite of Chartered Accountants of India © scanned wih oKEWScomer 3.1 INTRODUCTION In the earlier units of this chapter, we have studied the issue of share capital as a means of raising funds for financing the business activities. But with increasing and evergrowing needs of the corporate expansion and growth, equity source of financing is not sufficient. Hence corporates turn to debt financing through various means. Issuing debt instruments by offering the same for public subscription is one of the sources of financing the business activities. Debt financing does not only helps in reducing the cost of the capital but also helps in designing appropriate capital structure of the company. Debenture is one of the most commonly used debt instrument issued by the company to raise funds for the business. (© The Instute of Chartered Accountants of India © scanned with omen camer company accounrs Ca @ 3.2 MEANING The most common method of supplementing the capital available to a company is to issue debentures which may either be simple or naked carrying no charge on assets, or mortgage debentures carrying either a fixed or a floating charge on some or all of the assets of the company. A debenture is a bond issued by a company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest. If a charge” has been created on any or on the entire assets of the company, the nature of the charge and the assets charged are described therein. Since the charge is not valid unless registered with the Registrar, and the certificate registering the charge is printed on the bond. It is also customary to create a trusteeship in favour of one or more persons in the case of mortgage debentures. The trustees of debenture holders have all powers of a mortgage of a property and can act in whatever way they think necessary to safeguard the interest of debenture holders. Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture” debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. includes Thus, It is clear from definition that debenture may be Secured Debenture or Unsecured Debenture. Note: No company shall issue any debentures carrying any voting rights. (@ 3.3 FEATURES OF DEBENTURES 1. Its a document which evidences a loan made to a company. 2. It is a fixed interest-bearing security where interest falls due on specific dates. 3. Interest is payable at a predetermined fixed rate, regardless of the level of profit. 4. The original sum is repaid at a specified future date or it is converted into shares or other debentures. It may or may not create a charge on the assets of a company as security. It can generally be bought or sold through the stock exchange at a price above or below its face value. “Charge is an incumbrance to meet the obligation under the Trust Deed, whereby the company agrees to mortgage specific portion either by way of a first or second charge. Such charge implies right of lenders to secure their payment from such asset(s) or from the liquidator in the event of winding up or from the company when the charge becomes void. (© The Insite of Chartered Accountants of India © scanned wih oKEWScomer (@ 3.4 DISTINCTION BETWEEN DEBENTURES AND SHARES Debentures Shares 1. Debenture holders are the creditors of | 1. Shareholders are the owners of the the company. company. 2. Debenture holders have no voting rights | 2. Shareholders have voting rights and and consequently do not pose any threat | consequently control the total affairs of to the existing control of the company. the company. 3. Debenture interest is generally paid at a | 3. Dividend on equity shares is paid at a pre-determined fixed rate. It is payable, | variable rate which is vastly affected by whether there is any profit or not.) the profits of the company (however, Debentures rank ahead of all types of | dividend on preference shares is paid at shares for payment of the interest due] a fixed rate). on them, 4, Interest on debentures are the charges | 4. Dividends are appropriation of profit against profits and they are deductible] and these are not deductible in as an expense in determining taxable] determining taxable profit of the profit of the company. company. 5. There are different kinds of debentures, | 5. There are only two kinds of shares such as Secured/ Unsecured; | _Equity Shares and Preference Shares. Redeemable/ Irredeemable; Registered / Bearer; Convertible/ Non-convertible, etc. 6. In the Company's Balance Sheet, | 6. In the Company's Balance Sheet, shares Debentures are shown under “Long| are shown under “Shareholder’s Fund” Term Borrowings”. detailed in ‘Share Capital’ of Notes to Accounts, 7. Debentures can be converted into other | 7. Shares cannot be converted into other debentures or shares as per the terms of | shares in any circumstances. issue of debentures. 8. Debentures cannot be forfeited for non- | 8. Shares can be forfeited for non-payment payment of call moneys. of allotment and call moneys. 9. At maturity, debenture holders get back | 9. Equity shareholders cannot get back their money as per the terms and| — their money before the liquidation of the conditions of redemption. company (however, _preference shareholders can get back their money before liquidation). (© The Insite of Chartered Accountants of India © scanned wih oKEWScomer company accounrs [Link] the time of liquidation, debenture | 10. At the time of liquidation shareholders holders shareholders. holders, Trade payable, etc. are paid-off before the| are paid at last, after paying debenture (@ 3.5 TYPES OF DEBENTURES The following are the types of debentures issued by a company. They can be classified on the basis of: Security > Convertibility >> Permanence > Negotiability Priority 1. Security (@) Secured Debentures: These debentures are secured by a charge upon some or all assets of the company. There are two types of charges: (i) Fixed charge; and (ii) Floating charge. A fixed charge is a mortgage on specific assets. These assets cannot be sold without the consent of the debenture holders. The sale proceeds of these assets are utilized first for repaying debenture holders. A floating charge generally covers all the assets of the company including future one. (b) Unsecured or "Naked" Debentures: These debentures are not secured by any charge upon any assets. A company merely promises to pay interest on due dates and to repay the amount due on maturity date. These types of debentures are very risky from the view point of investors. 2. Convertibility (a) Convertible Debentures: These are debentures which will be converted into equity shares (either at par or premium or discount) after a certain period of time from the date of its issue. These debentures may be fully or partly convertible. In future, these debenture holders get a chance to become the shareholders of the company. (b) Non-Convertible Debentures: These are debentures which cannot be converted into shares in future. As per the terms of issue, these debentures are repaid. 3. Permanence (a) Redeemable Debentures: These debentures are repayable as per the terms of issue, for example, after 8 years from the date of issue. (© The Insite of Chartered Accountants of India © scanned wih oKEWScomer ME a

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